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STOCHASTIC OSCILL


OSX Looks Ripe For A Measured Move

02/15/07 02:28:51 PM
by Arthur Hill

The recent rally in the Oil Services Index ($OSX) looks like a corrective advance, and a breakdown from here would call for a measured move lower.

Security:   $OSX
Position:   Hold

On the daily chart (Figure 1), the Oil Services Index ($OSX) declined sharply from mid-December to mid-January and then rallied over the last five weeks. The rally retraced 50–62% of that decline and formed a rising wedge. Both the retracement and the pattern are typical for corrective advances. Most recently, the stock stalled over the last five days, and traders should be on guard for a continuation lower.

Graphic provided by: Telechart 2007.
 
Two things will signal a continuation lower. First, OSX needs to break the lower trendline of the rising wedge. As long as this trendline holds, the wedge is still rising and it is premature to count on a reversal. Second, look for the stochastic oscillator to move below 50. This centerline separates bullish momentum with bearish momentum. The bulls have the edge when the stochastic oscillator is above 50 and the bears have the edge when it is below 50 (Figure 2). The red vertical lines show the last three crossovers.

 
A breakdown from current levels would signal a continuation of the December–January decline. We can then use the measured move technique to find a target. The first decline was 37 points, or 17%. I prefer percentages and would look for another 17% decline from the February high. This would target a move to around 167. We can also employ a little Elliott wave and consider the current advance as wave B of a potential ABC decline. A wave C continuation would be expected to equal wave A.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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